By ANJANI TRIVEDI and EWEN CHEW
Wall Street Journal
Aug. 14, 2015

Currency falls more than 3% Friday to a fresh 17-year low

Malaysia’s ringgit suffered its largest one-day loss in almost two decades, with investors pulling cash out of stocks and bonds, as the nation’s list of challenges appears to be getting longer.

The ringgit shed more than 3% against the U.S. dollar Friday, leading the losses in global currency markets and falling to a fresh 17-year low.

Malaysia’s benchmark index was down 5.4% for the week, the region’s worst-performing stock market. Yields, which move inversely to prices, on five-year Malaysian government bonds rose 0.20 percentage point this week to their highest level since the global financial crisis.

Earlier this week, a number of currencies in the region tumbled after China’s surprise move to devalue its currency, which many saw as a threat to its export-dependent neighbors. But the ringgit has a set of issues all its own.

From South Korea to Malaysia, China’s neighbors have seen their currencies slide since the yuan was devalued. WSJ market reporters Chao Deng and Anjani Trivedi discuss whether these countries should be worried.

The most immediate challenge is the limited scope of Malaysia’s central bank to step in. For weeks, it tried to stem the currency’s slide, digging into its foreign-exchange reserves to prop up the ringgit and warning banks from aggressively trading against its currency. Now, reserves are dwindling, down more than $19 billion so far this year.

Malaysia also faces mounting pressure amid an investigation into its debt-saddled state investment fund, 1Malaysia Development Bhd., casting a shadow on the nation’s governance and unnerving investors.

Like many emerging markets, Malaysia’s woes are exacerbated by falling oil prices and a strong U.S. dollar on the back of potentially higher rates in the U.S. That could lead to further capital flight.

At a press conference this week, Malaysia’s central bank governor said that foreign-exchange reserves are adequate and that imposition of capital controls to stem outflows is not an option. Analysts note that outflows of Malaysian residents also have picked up.

Analysts at Bank of America Merrill Lynch now say the central bank may be forced to raise interest rates in Malaysia to help tighten monetary conditions as a last resort.

Meanwhile, the central bank has said the currency doesn’t reflect the state of the economy.

To be sure, in the second quarter of this year, gross domestic product growth in Malaysia ticked up at 4.9% year-on-year. While that was better than expected, it was still close to the slowest pace in two years.

On Friday, traders say the central bank was seen selling U.S. dollars briefly in the onshore market after bouts of frenzied trading activity sent the ringgit as far as 4.15 against the U.S. dollar in early trade. The Malaysian ringgit last traded at 4.05.